Stock Market Poised For 'Big Low' And 'Big Rally' As Fund Managers Cash Out Over Financial Stability Concerns - Forbes

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Topline

As signs of an economic slowdown grow, fund managers around the world are plowing into safe-haven assets like cash at near-record levels, suggesting to Bank of America analysts that the stock market may be due for much more turbulence—including a new low and forceful bear market rally—over the next several months.

Key Facts

According to Bank of America's latest fund manager survey, investors are now holding about 6.3% of their portfolios in cash—the highest level since April 2001 as concerns over financial stability risks reach the highest level on record.

The concerns have weighed heavily on the domestic stock market, which has started to react more to global financial woes, the analysts wrote as volatility expectations measured by the Vix Index spiked to the highest level in nearly four months.

The survey, composed of 371 panelists managing $1.1 trillion, also found market liquidity has "deteriorated significantly" over the past month—with managers rating conditions at levels seen only during the Covid-induced crash in April 2020 and the Great Financial Crisis that started in 2007.

Amid the virtually universal bearishness, Bank of America's analysts predict stocks are poised for a "big low" and "big rally" in the first half of next year, when the majority of economists believe the Federal Reserve will stop hiking interest rates as it works to combat inflation.

They also note investors' economic outlooks remain close to max bearishness, with 72% of fund managers expecting the economy will weaken over the next 12 months—just below a record high print from July.

Key Background

With prolonged inflation forcing central banks to hike interest rates aggressively this year, stocks have suffered immensely as investors brace for how much the hikes may slow the economy. After surging 27% in 2021, the S&P has plummeted 23% this year, and the tech-heavy Nasdaq is down 33%. Both indexes hit two-year lows last week, and Morgan Stanley projects the S&P will ultimately hit a bear-market low of between 3,000 and 3,400 points—suggesting the index, which is already down 21.5% this year, could still plummet another 10% to 20%.

Surprising Fact

The share of investors believing the economy is nearing the end of expansion this cycle has dropped to 67% in September since hitting a post-pandemic peak of 80% in June. Historically, a drop of this magnitude has coincided with a recession, Bank of America notes.